Bloomberg News

Big Four Auditors Welcome China’s Rule to Localize Firms

May 11, 2012

Three of the biggest global auditing firms said a new directive from China to put locally licensed accountants in charge of operations fits with their strategies as the country shifts to an international business model.

Chief partners in the world’s second-largest economy must within three years be locally certified Chinese citizens, a requirement that none of the so-called Big Four auditors meets, the Ministry of Finance said yesterday. Affiliates of Ernst & Young Global Ltd., KPMG International Cooperative and PwC International Ltd. said they support the move.

The firms, which operate as joint ventures, must restructure to comply with international practice, the ministry said. China is moving to adopt global standards after dozens of companies disclosed auditor resignations or accounting irregularities last year, leading to the suspension or delisting of their shares.

“This is not protectionism, it’s to encourage local partners to grow faster,” said James Lee, regional director for greater China of the Institute of Chartered Accountants. “In other countries, this is normal.”

The four firms, with 25 subsidiaries in China, had 9.5 billion yuan ($1.5 billion) of revenue in 2010, representing 26 percent of the industry’s total, according to the Ministry of Finance.

SEC Suit

The U.S. Securities and Exchange Commission and the auditor watchdog group it supervises have met repeatedly with Chinese counterparts to discuss lifting barriers for inspectors to review auditors of U.S.-listed companies in China.

The SEC on May 9 sued Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. for the second time in a year, alleging that the firm refused to provide documents related to a China-based company under investigation for potential accounting fraud against U.S. investors.

The agency issued an administrative subpoena to the firm in May 2011 seeking information related to an investigation of Chinese company Longtop Financial Technologies Ltd.

Deloitte has said that under Chinese rules, accounting firms in the country aren’t allowed to hand documents to any foreign regulator without government approval, according to Bloomberg BNA Law Reports.

‘Respond Positively’

“We will respond positively to the program by ensuring a smooth and successful transformation of the firm from the existing joint venture structure,” KPMG’s Chinese affiliate said in a statement, adding it “welcomes” the directive. Ernst & Young said the new rules are “in line with” its strategy and PwC China said it has been “actively localizing its China practice.”

Colleen Brennan, a spokeswoman for the U.S. Public Company Accounting Oversight Board that oversees auditors, had no immediate comment. Representatives of Deloitte Touche Tohmatsu Ltd., the remaining member of the Big Four, didn’t respond to requests for comment.

Currently, about half of the partners at Big Four firms are non-China-certified accountants, with most of them Hong Kong citizens, the ministry said.

When converting into a partnership, a firm must have at least 25 partners and more than 100 China-certified accountants as well as 10 million yuan of registered capital, the ministry said. Non-China-certified partners should represent no more than 40 percent of the total, and the percentage should be further lowered to no more than 20 percent in five years.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net; Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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